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Monday, April 23, 2012

American Lorain Corporation (NYSE: ALN), a Global Exporter

In our quest to find undervalued companies, the Chinese reverse merger sector currently offers a lot of opportunities that can be hardly overlooked. We recently covered Skystar Bio-pharmaceutical Company (SKBI) and it seems that at least another company offers the kind of value that we are looking for.

According to Reuters, American Lorain Corporation (ALN), incorporated on February 4, 1986, is an integrated food manufacturing company. It develops, manufactures and sells food products, which include chestnut products, convenience foods, including ready-to-cook (RTC), foods, ready-to-eat (RTE), foods and meals ready-to-eat (MRE). ALN conducts its production activities in China. ALN operates under three segments: chestnut products, convenience food products, and frozen food products. During the year ended December 31, 2009, it produced 230 products, including 19 new products in its convenience foods segment. Its products are sold in 26 provinces and administrative regions in China and 42 foreign countries. Its subsidiaries include International Lorain Holding, Inc. (ILH), Luotian Green Foodstuff Co., Ltd. and Junan Hongrun Foodstuff Co., Ltd. The company operates in the following categories:

Chestnut Products

ALN developed brand equity for its chestnut products in China, Japan and South Korea. The chestnuts produced include aerated open-bottom chestnuts, which are chestnuts packaged with nitrogen; sweetheart chestnuts, which are sweet preserved chestnuts; chestnuts in syrup, and golden chestnut kernels. They are natural and do not contain chemical additives. The chestnut contains small quantities of oil and complex carbohydrates. Chestnuts are commonly steamed, boiled, sugar stir-fried, roasted or added into dishes or desserts as an ingredient. ALN differentiates its chestnut products based on flavor, size and method of packaging. The chestnut products that are sold in Japan are packaged in plastic bags or tin cans, each considered a different product. Some of its chestnut products are processed with hot water or cold water. The Company competes with Hebei Liyun and Foodwell Corporation.

Convenience Foods

ALN’s convenience food products are characterized as Ready-to-cook, or RTC, food products, Ready-to-eat, or RTE, food products, and Meals ready-to-eat, or MRE, food products. RTCs can be served after a few easy cooking procedures. When preparing a RTC, customers need only to heat the food in a microwave or boil it for several minutes before eating. RTEs can be served without any cooking. It includes various pickle products. Other RTEs include spiced belt fish, cherry tomato, spicy pork fillet, pork and egg roll, pears and pineapples. MREs are meal kits with self-heating devices. These are used in both military and civilian uses, such as camping, traveling and other situations, in which a person does not have access to traditional cooking supplies and equipment, such as a stove or microwave. During 2009, ALN also introduced MRE products that are microwaveable. MREs are based on various styles of food, such as Italian cuisine and Chinese cuisine. During 2009, ALN produced 117 convenience food products, including 16 new products, such as candied bean products and MRE microwaveable rice products.

Frozen Food Products

ALN produces a variety of frozen foods, including frozen vegetables, frozen fruits, frozen fish, and frozen meats. During 2009, it produced 61 frozen food products. The frozen foods sold during 2009 were frozen asparagus and frozen corn. During 2009, this segment contributed 15.7% of its total revenues. The Company competes with Weitang Langdong, Yuyao Hongji Food Co. Ltd. and Yantai Pengshun Food Co. Ltd.

Let's take a loot at the fundamentals for the company. Assuming the current P/E ratio of 2.3, the current price assumes that the earnings of American Lorain will remain flat over the next 5 years, giving us a 2017 price of 1.33$. However, public information tells us that earnings have been growing at about 25% a year over the past 7 years. Let's make another assumption and let's say that the current inflationary environment puts some breaks on the growth of Lorain's earnings and that the company is only able to grow EPS at 10% per annum. We find ourselves with a 2017 price of 2.35$ per share with the current P/E ratio. The industry's average P/E stands at 39, but even with a ratio of 10 in 2017, American Lorain would be worth around 21$ per share. The past performance of the company can be seen here:

Also, American Lorain has managed to grow it's book value per share over the past 6 years at an average rate of 35% per year. Assuming the pace slows down to 24% as the company gets bigger, we end up with a book value of nearly 16$ per share in 2017. If we use the current incredibly depressed Price/Book ratio of 0.29, we end up with a price per share of 4.76$. If we compare once again to the industry, we see that the average Price/Book ratio is close to 8. Using an alarmingly conservative Price/Book ratio for the year 2017, we obtain a value of 32$

The following table shows the relatively conservative 2017 price targets using different methods, even some that were not explored in details here:

Taking into account that the previously raised assumptions are not too optimistic, it seems to therefore that the market has a biased bearish view on the long term prospects of American Lorain Corporation, mostly compared to companies doing business in the same industry. The buying opportunity screams very loudly in this case and cannot be ignored. Investors getting in right now have a pretty wide margin of safety in case the company's operations would come to disappoint in the inflationary context currently prevailing in China.

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